Liquidity Crisis & its causes in Nepal

Liquidity Crisis & its causes in Nepal

We would like to thank for their suggestions and help • Mr. Achyut Pant • Mrs. Anita Pradhan Nepal • Mr. Punaram Ghimere

Methodology • Internet • NRB report. • Various Books • Newspapers.

Definition: A state in which there is a short supply of cash to lend to business and consumers and interest rate is high. There is less availability of credit

Background : • Per –capita income of an average Nepali is about $300. • Less income , so less saving which automatically leads to less investment

Backbones of Nepalese Economy • Agriculture • Remittance • Foreign Aid • Tourism

Factors Indicating Crisis :- • Reserve Money decreased by 2.9% in comparison to last year. • The Inter Bank Transaction Interest Rate has increased up to 12% to 14% • Liquidity Assets declined by 11.1%( 167.12 billion)

Probable Causes:- • Low increasing rate of REMITTANCE Remittance has just increased by 10.4 % Last year it was 65.8%

Difference in Import and Export Export has declined by 18.7% Import has risen up by 32.8% About 8 billion money has frozen in Hongkong to import wool.

Increased Living Standard:- People’s living standard has increased. So they consume more and more of luxurious goods, which are generally to be imported. Like Cars, Mobiles etc. This results in outflow of cash.

Investment greater then the deposit. Deposit about 40 billion while investment is 75 billion Credit increased by 13.4% ( about 54.38 billion) last year it was 10.2%(31.4 billion)

Investment in Unproductive sector Large percentage of investment is done in the unproductive sectors like Real Estate, Gold, Luxury Goods like Cars, Mobiles etc. Credits in Productive Sector increased by just 8.2% Latest report says that Investment in Gold increased from 11 Arab to 33 Arab

Investment done in Foreign Land People feel safe when they do investment in foreign countries, especially in India. Outflow of cash to India is high due to investment in programs like mutual funds.

Illegal Hundi of Money to Foreign countries

Increased Holding Money People feel safe to have money in hand rather than bank thinking won’t get money when needed. About 2 crore cash is frozen in ATMs machine.

False Advertisement or News The more and more attention of media regarding crisis and their analysis has made people more suspicious . So they are withdrawing money from the bank.

Government’s Fault. Budget Delayed by 5 months. Money is frozen with government as no big expenditure of government in comparison to its large collection

Political Instability

Effects:- • Less availability of loans in market. • High inter banking transaction interest rate • High Interest Rate

Steps to remedy it. • NRB injected about Nrs. 20 billion through Repo. • NRB strictly prohibited to invest more then 40% in real state and housing loan. • NRB has seek help from World Monetary Fund incase of emergency. • Government decided to invest in development projects

Conclusion:- Though factors like decreasing remittance rate, increasing investment in unproductive area will increase economic crisis. But also experts say still Nepali is not really in crisis. But, if ongoing condition continues, there will really be economic crisis. So more effective steps are expected.

Data and figures presented in this report are taken from the of Nepal Rastra Bank, various reports and newspaper.

Liquidity Crisis & its causes in Nepal